Get past the fear so you can start creating wealth.
There’s an old joke about the best way to make $1 million in the stock market: All you have to do is invest $2 million. If that cheesy quip prompted you to break out in a cold sweat, it’s time to face your stock market fears. Try these five investing tips to conquer the panic so you can start building a financially secure future today.
1. Invest money you can afford to lose
Investing money you can afford to lose is not the same as expecting to lose. It’s a strategy to protect yourself from having to beg, borrow, or steal if your portfolio value drops temporarily.
The usual rule of thumb is to only invest funds you don’t need for at least five years. The reason is because financial markets go up and down over short periods of time. But the longer the time period, the lesser the chances that the market will have dropped in value. If you are terrified of losing on your investments, extending that window from five years to 10 or 15 years is an easy fix.
History shows only a few examples of the S&P 500 losing money over 10-year timeframes. These resulted from fairly extreme circumstances — the Great Depression, the devaluation of the U.S. dollar in the 1970s, and the Great Recession. The worst 10-year performance for the index ended in 2008, when it lost 3.8%. And importantly, the S&P 500’s most impressive bear market in history kicked off in the very next year.
2. Relive history
The market moves in cycles of growth, interrupted by corrections and crashes. A review of history’s major market downturns, and the recoveries that followed them, can help you get comfortable with that reality.
3. Be a student
There are some simple ways to manage your investment risk. Learning about these strategies can improve your confidence dramatically. As a start, dedicate an hour weekly to reading about diversification, asset allocation, and buy-and-hold investing.
4. Set it and forget it
If you automate your investing activities, you don’t have to fight against your anxiety on every trade. You’ll also benefit from dollar-cost averaging, which is the practice of investing set dollar amounts at regular intervals. Dollar-cost averaging evens out your cost-basis over time, which can lead to higher earnings.
Several mainstream brokers allow for automatic investing in mutual funds, including Charles Schwab and Fidelity. Establish a manageable monthly investment budget, set up your investment choices, and let the automation do the work. You might even limit how often you check your account, so you’re not getting emotional about every market blip.
5. Make a crash plan
Every investor needs a crash plan, even if that plan is to do nothing. A plan keeps you grounded and focused. Without one, you’re more likely to take actions that will make your worst fears become reality.
Those actions can include turning off your automatic investments or, worse, selling your holdings. These are often the most damaging actions you can take in a downturn. Stop investing and you miss the chance to buy shares at a discount. Sell your holdings and you lock in losses and eliminate any chance of benefiting from the recovery that will eventually follow.
A good plan might involve staying the course, adding exposure to recession-proof stocks or mutual funds, or increasing your monthly investment to profit from temporarily low share prices. After all, if you don’t need the money for 10 years, you can afford to wait for the recovery.
You might also impose a selling moratorium on yourself — like, no selling within five business days of a big market shift.
Whatever approach you choose, write it down somewhere. That way, you can easily revisit your strategy when the time is right.
Learn and practice
The more you learn about and practice investing, the less mysterious and scary it will be. Start small with money that’s not earmarked for something else. Then, gradually work your way up to larger buys over time. Just keep at it — because your confidence will grow as you gain financial momentum. And, on the other side of that investing fear, there’s a big, rich world out there waiting for you.
Enjoy this complimentary download: 3 Things to Do in a Market Downturn